ESG Investing: A Sustainable Win-Win Strategy for Companies

By: Rayhaan Iskander and Jonn Lim

Posted: 25th June 2023

In recent years, ESG, a framework for responsible investing, has gained expansive popularity within the global sphere. Specifically in 2022, ESG investing is estimated at over $20 trillion AUM and has incited approximately 80% of the world’s largest corporations to adopt GRI Protocols. With investors no longer solely driven by financial incentives, institutions must recognise the importance of aligning their operations with sustainable practices and principles.

So what is ESG?

ESG investing goes beyond financial considerations and considers a set of standards used by socially conscious investors to assess a company’s behaviour when evaluating potential investments. Ultimately, this framework is divided into 3 core pillars: Environmental factors, Social factors and Governance factors. Specifically, environmental factors focus on a company’s footprint on the natural world through observing factors such as its carbon emissions, pollution, deforestation, renewable energy initiatives, waste management and sustainable practices. Social factors are intertwined with concerns regarding human rights, labour standards, employee welfare, and community relations alongside diversity and inclusion. Lastly, governance factors encompass an entity’s internal system of leadership, accountability and transparency regarding board structure, shareholder rights, internal corruption, legal history and political contributions.

The Rise of ESG

The term ESG was first coined in 2005 under a report written by impact investing expert Ivo Knoepfel, titled “Who Cares Wins”. The report came after an incident in January 2004 wherein UN Secretary-General Kofi Annan wrote to over 50 CEOs of major financial institutions. Subsequently, he invited them to participate in a joint initiative under the UN Global Compact with support from the International Finance Corporation (IFC) and the Swiss Government to find solutions where corporations can integrate ESG practices into capital markets. Knoepfel’s report articulates how embedding ESG factors into financial markets is wise from a corporate standpoint and paves the way for more sustainably run markets and responsible investing. This stimulated the formation of the UN Principles for Responsible Investment (PRI) Report in 2006 alongside the launch of the Sustainable Stock Exchange Initiative (SSEI) a year after.

ESG’s traction continued to grow in 2015 when the Paris Climate Agreement was formed in order to tackle climate change alongside the formation of the UN’s 17 Sustainable Development Goals - a blueprint that aims to create a more sustainable future around the global sphere. These events have highlighted the need for global cooperation to address sustainability and allowed for ESG investing to expand in growth wherein in 2019 the Business Roundtable’s (BRT) statement on the purpose of a corporation would see the signatories of over 180 CEOs of large enterprises.

Currently, some of the most significant financial institutions such as BlackRock Inc, the world’s largest asset manager, have acknowledged ESG as a priority within day-to-day operations with more and more large firms following suit. However, despite many stakeholders having welcomed ESG on a global scale, there lacks a prevalence of uniform reporting standards within markets.

Why ESG?

In this vein, an implementation towards ESG investing hosts a myriad of benefits for companies. Specifically, ESG promotes an enhanced reputation and creates brand value for socially conscious investors, differentiating themselves from competitors as a strong sustainable practice and attracting more access to capital from institutional investors. On top of this, ESG mitigates legal and regulatory risks. By integrating ESG factors into business practices, companies are in a better place to withstand reputational damage, legal liabilities and supply chain disruptions, ultimately protecting long-term viability and assisting in reducing potential financial loss. Indeed, embracing ESG practices will drive innovation and stakeholder engagement within companies, which as a result allows for firms to adapt towards a rapidly changing business landscape and foster creative solutions, cost-saving opportunities and community trust to thrive within global markets.

A Glimpse into the Future…

This being said, what does the future of ESG actually look like? Well, as the globe constantly evolves and economic, environmental and social trends continue to adapt, ESG continues to gain momentum and expand its overarching influence across many industries. Driven by stakeholder expectations, regulatory developments and investor preference, the focus on climate change places firms on sustainable practices and embraces the transition towards a low-carbon economy. Additionally, the continuous innovation of pioneering leading-edge technology will also play a heavy role in embracing core ESG practices, such as the embedding of supply chain technology to mitigate the risk of unethical practices and analytical data collection to meet ESG-based KPIs. Ultimately, the future of ESG holds exciting prospects as it continues to become more mainstream as an investment strategy, prioritising long-term value creation, ethical governance and societal impact to drive a more sustainable, equitable and resilient economy in the corporate realm.